188.8.131.52 Income from Sale of Property - Payments Deferred or by Instalments
The sale of a property, where the purchase price is paid over an agreed period, MAY be treated as income depending on whether or not the sale creates:
- a loan, or
- a sale agreement.
If the sale creates a loan, then the loan will be subject to deeming.
Policy reference: SS Guide 1.1.L.65 Loan (assets test)
In a sale agreement money moves from the purchaser to the seller subject to the terms of the contract. IF a sale agreement provides for interest to be paid on the outstanding purchase price balance, then the interest payable IS treated as income for social security purposes.
IF a sale agreement does NOT provide for interest to be paid on the outstanding purchase price balance, then it MAY be necessary to obtain an actuarial valuation of the payments due.
Explanation: A person may sell a property with the purchase price being paid over an agreed period. In all cases the repayment of the purchase price of the property is not income for social security purposes. The face value of amounts that are payable only at a future date must be discounted to work out their present value. If the present value of the payment is less than the value of the property sold the agreement may involve deprivation of assets.
To decide whether a formal valuation is required, the value of payments due under a sale agreement can be estimated by adding the amounts to be paid and multiplying this by a discount factor.
The discount factor will depend upon:
- the upper deeming rate at the date of the agreement,
- the term (in years) for repayment, and
- whether the purchase price is paid in regular instalments or as a single payment.
N = the term for repayment in years
R = upper deeming rate at the date of agreement
|Purchase Price||Estimated discount factor|
Example: Person sells a property and will receive one payment of $50, 000 ten years after the sale. The deemed interest rate for the sale is 6%. The estimated current value for the sale is $28,100.
1 − (N × R) + (N × R × (N - 1) × R ÷ 2)
1 − (10 × 0.06) + (10 × 0.06 × 9 × 0.03) = 0.562
The estimated value is $50,000 × 0.562 = $28,100
Paid in equal instalments
Example: Person sells a property and will receive $50, 000 in equal payments over 10 years for the sale of the property. The deemed interest rate for the sale is 6%. The estimated current value for the sale is $39,050.
1 − (N × R ÷ 2) + (N × R × (N − 1) × R ÷ 4)
1 − (10 × 0.03) + (10 × 0.06 × 9 × 0.015) = 0.781
The estimated value is $50,000 × 0.781 = $39,050